Audra

About Audra

Written by highly regarded leaders in the industry, Franchise Dictionary Magazine is a hands-on, how-to, online resource, which provides prospective owners with everything they need to know about launching—and sustaining—a franchise business. Each month, experts will offer advice and resources to help turn your franchise business into a booming success.

Franchise Dictionary Magazine is emailed every month to more than 250,000 readers. Our subscription list is growing every day. This is the only magazine we’re focused on; this is the only field we’re dedicated to; and this is the one and only magazine that will give you hard facts, unbiased opinions, and relevant news that can take you every step of the way to successful franchise ownership.

Special Considerations for Educational Franchisees

By Jonathan Barber

Educational franchises are hot right now. Day-care centers, sports leagues, music, art, and tech concepts are taking over. You can walk through a strip mall in any suburban area and count the children-focused franchises. And there’s something else you’ll notice—they’re packed! Our firm has worked with many franchisees who bought into educational franchises, and I recently franchised a long-standing children’s art studio. But if you are looking into an educational or child-focused franchise, then there’s a few unique points to keep in mind.

State Daycare Laws

I had never known about state day-care laws until I was drafting a franchise disclosure document for a new educational concept. In every state, there are laws that regulate daycares. Each of these laws defines “daycare” differently, too. Some states base the definition of daycare on the number of hours a child is present at the business. For instance, if a child spends at least three hours at the business, then that business is considered a daycare. Initially, this doesn’t sound too important, but the ramifications of being classified as a daycare are huge. In every state, daycares are subject to heavy regulation. Typically, the Department of Social Services (“DSS”) or the Department of Human Services (“DHS”) regulate daycares. Immediately upon being classified as a daycare, the business will have to obtain a daycare license, which can be an expensive and grueling process. If anything at the business fails an examination, the business will be subject to heavy fines and, potentially, closure.

Safety

Safety is an obvious concern any time children are involved. You will use common sense to figure out if a particular franchise model is safe for children. However, there are some additional concerns you should keep in mind. For instance, is this business a drop-off model where children are dropped off for a class or session and then picked up by their parents or guardians afterward? Are the parents or guardians present while the children are there? You will want to make sure the franchise has solid systems and procedures for ensuring the children are safely dropped off and picked up. For example, if a mother brings her child to a class, you will want to know who, if not the mother, is authorized to take that child home. If the family is going through a domestic issue and an unauthorized person like an estranged parent picks up the child, you could face serious liability for letting the child go with someone unauthorized.

Competition

On a less scary note, consider the competition in the educational and children-focused franchise space. Are you going to drop a children’s art studio right between a children’s dance studio and a children’s swimming franchise? Essentially, your competition encompasses all extracurricular activities, not just art. Talk with the franchisor about which other children-focused franchises might compliment your own. In the adult-space, it makes sense to drop a juice bar next to a fitness franchise. Children’s concepts will have their own synergies, but you have to take the time to find them.nged parent picks up the child, you could face serious liability for letting the child go with someone unauthorized.

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of clients world-wide with their FDDs and franchise purchases. Barber also represents emerging and established franchisors. Contact Barber at 980-202-5679 or JBarber@barberpowerlaw.com. Visit www.barberpowerlaw.com.

Special Considerations for Educational Franchisees

By Jonathan Barber

Educational franchises are hot right now. Day-care centers, sports leagues, music, art, and tech concepts are taking over. You can walk through a strip mall in any suburban area and count the children-focused franchises. And there’s something else you’ll notice—they’re packed! Our firm has worked with many franchisees who bought into educational franchises, and I recently franchised a long-standing children’s art studio. But if you are looking into an educational or child-focused franchise, then there’s a few unique points to keep in mind.

State Daycare Laws

I had never known about state day-care laws until I was drafting a franchise disclosure document for a new educational concept. In every state, there are laws that regulate daycares. Each of these laws defines “daycare” differently, too. Some states base the definition of daycare on the number of hours a child is present at the business. For instance, if a child spends at least three hours at the business, then that business is considered a daycare. Initially, this doesn’t sound too important, but the ramifications of being classified as a daycare are huge. In every state, daycares are subject to heavy regulation. Typically, the Department of Social Services (“DSS”) or the Department of Human Services (“DHS”) regulate daycares. Immediately upon being classified as a daycare, the business will have to obtain a daycare license, which can be an expensive and grueling process. If anything at the business fails an examination, the business will be subject to heavy fines and, potentially, closure.

Safety

Safety is an obvious concern any time children are involved. You will use common sense to figure out if a particular franchise model is safe for children. However, there are some additional concerns you should keep in mind. For instance, is this business a drop-off model where children are dropped off for a class or session and then picked up by their parents or guardians afterward? Are the parents or guardians present while the children are there? You will want to make sure the franchise has solid systems and procedures for ensuring the children are safely dropped off and picked up. For example, if a mother brings her child to a class, you will want to know who, if not the mother, is authorized to take that child home. If the family is going through a domestic issue and an unauthorized person like an estranged parent picks up the child, you could face serious liability for letting the child go with someone unauthorized.

Competition

On a less scary note, consider the competition in the educational and children-focused franchise space. Are you going to drop a children’s art studio right between a children’s dance studio and a children’s swimming franchise? Essentially, your competition encompasses all extracurricular activities, not just art. Talk with the franchisor about which other children-focused franchises might compliment your own. In the adult-space, it makes sense to drop a juice bar next to a fitness franchise. Children’s concepts will have their own synergies, but you have to take the time to find them.nged parent picks up the child, you could face serious liability for letting the child go with someone unauthorized.

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of clients world-wide with their FDDs and franchise purchases. Barber also represents emerging and established franchisors. Contact Barber at 980-202-5679 or JBarber@barberpowerlaw.com. Visit www.barberpowerlaw.com.

Breaking Down the FDD

Item 19: Financial Performance Representations

by Nicole Micklich

All prospective franchisees want to be sure they can make money if they buy a franchise. Items 19 and 21 of the franchise disclosure document (FDD) can help prospective franchisees assess the likelihood that they will reach financial success in a system.

Franchisors are permitted, but not required, to include financial performance representations in their FDDs. A financial performance representation is any oral, written, or visual representation to a prospective franchisee that states expressly or impliedly a level or range of actual or potential sales, income, or profits. This includes statements made in the media. Financial performance representations can take the form of charts or tables, or calculations of possible results.

Most often, a financial performance representation simply states a level or range of potential earnings. Such a representation might say, “During 2015 and 2016, 2,020 stores were in continual operation. These 2,020 stores had an average sales of $403,937 for the entire year 2016. A total of 848 stores had sales above this average, and 1,172 stores had sales lower than the average. The median sales for these 2,020 stores was $378,231.” Some financial performance representations use words like “sales volume,” “profit,” and “income.”

Statements from which a prospective franchisee can infer a level of income or profits are also financial performance representations. For example, “earn enough money to buy a new Lamborghini” qualifies as a financial performance representation. On the other hand, puffery is sometimes not a financial performance representation. If a franchisor tells a prospective franchisee that the franchise provides an opportunity to “make a lot of money,” the statement may be considered puffery, and not a financial performance representation. Providing cost data is also not the same as making a financial performance representation. Listing expenses in Item 7 alone does not constitute a financial performance representation.

WHAT’S REQUIRED

Franchisors are not required to make franchise performance representations. If a franchisor chooses to include financial performance representations, the franchisor must have a reasonable basis and written substantiation for the representation. The disclosure must include the bases and assumptions for the representation. Franchisors are prohibited from making representations that are false or unsubstantiated. If a franchisor does not make an Item 19 financial performance representation, the franchisor must not make any financial performance representations outside of the FDD, including in print and online.

Financial performance representations in Item 19 of the FDD can help potential franchisees understand whether a business can be profitable. Many franchisors include average gross sales for units and cost information in their FDDs. Prospective franchisees can also compare the Item 19 disclosures of different franchisors, because the methodology used to calculate the numbers in the disclosures should be consistent.

Item 21: Financial Statements

While franchisors have the option of providing financial performance representations, franchisors are required to include copies of their audited financial statements for the most recent three fiscal years in Item 21 of the FDD. This requirement exists so that prospective franchisees have enough information to analyze financial trends in the system.

Evaluating financial performance representations and financial statements can be daunting and confusing, so a prospective franchisee is wise to seek advice from a franchise lawyer and accountant.

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

SPECIAL SECTION: PART 6

Breaking Down the FDD

Item 19: Financial Performance Representations

by Nicole Micklich

All prospective franchisees want to be sure they can make money if they buy a franchise. Items 19 and 21 of the franchise disclosure document (FDD) can help prospective franchisees assess the likelihood that they will reach financial success in a system.

Franchisors are permitted, but not required, to include financial performance representations in their FDDs. A financial performance representation is any oral, written, or visual representation to a prospective franchisee that states expressly or impliedly a level or range of actual or potential sales, income, or profits. This includes statements made in the media. Financial performance representations can take the form of charts or tables, or calculations of possible results.

Most often, a financial performance representation simply states a level or range of potential earnings. Such a representation might say, “During 2015 and 2016, 2,020 stores were in continual operation. These 2,020 stores had an average sales of $403,937 for the entire year 2016. A total of 848 stores had sales above this average, and 1,172 stores had sales lower than the average. The median sales for these 2,020 stores was $378,231.” Some financial performance representations use words like “sales volume,” “profit,” and “income.”

Statements from which a prospective franchisee can infer a level of income or profits are also financial performance representations. For example, “earn enough money to buy a new Lamborghini” qualifies as a financial performance representation. On the other hand, puffery is sometimes not a financial performance representation. If a franchisor tells a prospective franchisee that the franchise provides an opportunity to “make a lot of money,” the statement may be considered puffery, and not a financial performance representation. Providing cost data is also not the same as making a financial performance representation. Listing expenses in Item 7 alone does not constitute a financial performance representation.

WHAT’S REQUIRED

Franchisors are not required to make franchise performance representations. If a franchisor chooses to include financial performance representations, the franchisor must have a reasonable basis and written substantiation for the representation. The disclosure must include the bases and assumptions for the representation. Franchisors are prohibited from making representations that are false or unsubstantiated. If a franchisor does not make an Item 19 financial performance representation, the franchisor must not make any financial performance representations outside of the FDD, including in print and online.

Financial performance representations in Item 19 of the FDD can help potential franchisees understand whether a business can be profitable. Many franchisors include average gross sales for units and cost information in their FDDs. Prospective franchisees can also compare the Item 19 disclosures of different franchisors, because the methodology used to calculate the numbers in the disclosures should be consistent.

Item 21: Financial Statements

While franchisors have the option of providing financial performance representations, franchisors are required to include copies of their audited financial statements for the most recent three fiscal years in Item 21 of the FDD. This requirement exists so that prospective franchisees have enough information to analyze financial trends in the system.

Evaluating financial performance representations and financial statements can be daunting and confusing, so a prospective franchisee is wise to seek advice from a franchise lawyer and accountant.

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

Why do I Have to Sign a Receipt for an FDD?

By Jonathan Barber

If a franchisor sends you, a potential buyer, a 200-to-300 page document and asks you to sign a “receipt page,” don’t panic. You’re only helping the franchisor to remain compliant with state and federal franchise laws. The receipt pages are not part of a contract, and you are not binding yourself to anything by signing them. They exist purely to show the date you were given or “disclosed” with the franchise disclosure document, commonly referred to as the “FDD.”

The Disclosure Rules

Why is that date so important? The Federal Trade Commission (FTC) requires franchisors to send each prospective franchisee a copy of its FDD, and the prospective franchisee cannot sign a franchise agreement or make payments to the franchisor until fourteen days after receiving the agreement. If a franchisee signs a franchise agreement or pays the franchisor prior to the 14 days he was disclosed with the FDD, the franchisor is in a world of trouble. Federal and state laws label this as an “unfair and deceptive trade practice,” which carries significant damages. Down the road, the franchisee could have serious claims against the franchisor, based solely on the timing of the disclosure.

There are certain exemptions to the 14-day disclosure rule. Primarily, the FTC exempts the transfer of a franchise by an existing franchisee, as long as the franchisor has not had “significant involvement” with the prospective franchisee. Therefore, technically, a franchisor doesn’t have to disclose you if you’re buying an existing location. However, if you will be required to sign the franchisor’s then-current form of franchise agreement as a condition of the resale, then you must be disclosed even though you’re buying an existing location. Similarly, if the franchisor directs you toward buying an existing location, he must disclose you with the FDD. At the end of the day, while there are certain exemptions, it’s best practice for franchisors to simply disclose every prospective franchisee whether that candidate is exploring a resale or a new franchise location. We represent about 65 franchisors, and we recommend this to all of them.

What to do if you’re not disclosed

If you’re in the process of buying into a franchise, and the franchisor has not provided the FDD, you should reach out immediately and ask for a copy. Most franchisors are fairly sophisticated and understand the basics of franchising enough to follow the disclosure rules. If you have already bought into a franchise and were never disclosed with the FDD, you should talk to an attorney to determine your options. If you have a great relationship with your franchisor, bring it up with them. However, if you weren’t disclosed, you are probably facing other issues with your franchised business. Franchisors are required to follow the federal and state franchise laws, which exist to protect the consumer—you!

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of clients world-wide with their FDDs and franchise purchases. Barber also represents emerging and established franchisors. Contact Barber at 980-202-5679 or JBarber@barberpowerlaw.com. Visit www.barberpowerlaw.com.

Why do I Have to Sign a Receipt for an FDD?

By Jonathan Barber

If a franchisor sends you, a potential buyer, a 200-to-300 page document and asks you to sign a “receipt page,” don’t panic. You’re only helping the franchisor to remain compliant with state and federal franchise laws. The receipt pages are not part of a contract, and you are not binding yourself to anything by signing them. They exist purely to show the date you were given or “disclosed” with the franchise disclosure document, commonly referred to as the “FDD.”

The Disclosure Rules

Why is that date so important? The Federal Trade Commission (FTC) requires franchisors to send each prospective franchisee a copy of its FDD, and the prospective franchisee cannot sign a franchise agreement or make payments to the franchisor until fourteen days after receiving the agreement. If a franchisee signs a franchise agreement or pays the franchisor prior to the 14 days he was disclosed with the FDD, the franchisor is in a world of trouble. Federal and state laws label this as an “unfair and deceptive trade practice,” which carries significant damages. Down the road, the franchisee could have serious claims against the franchisor, based solely on the timing of the disclosure.

There are certain exemptions to the 14-day disclosure rule. Primarily, the FTC exempts the transfer of a franchise by an existing franchisee, as long as the franchisor has not had “significant involvement” with the prospective franchisee. Therefore, technically, a franchisor doesn’t have to disclose you if you’re buying an existing location. However, if you will be required to sign the franchisor’s then-current form of franchise agreement as a condition of the resale, then you must be disclosed even though you’re buying an existing location. Similarly, if the franchisor directs you toward buying an existing location, he must disclose you with the FDD. At the end of the day, while there are certain exemptions, it’s best practice for franchisors to simply disclose every prospective franchisee whether that candidate is exploring a resale or a new franchise location. We represent about 65 franchisors, and we recommend this to all of them.

What to do if you’re not disclosed

If you’re in the process of buying into a franchise, and the franchisor has not provided the FDD, you should reach out immediately and ask for a copy. Most franchisors are fairly sophisticated and understand the basics of franchising enough to follow the disclosure rules. If you have already bought into a franchise and were never disclosed with the FDD, you should talk to an attorney to determine your options. If you have a great relationship with your franchisor, bring it up with them. However, if you weren’t disclosed, you are probably facing other issues with your franchised business. Franchisors are required to follow the federal and state franchise laws, which exist to protect the consumer—you!

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of clients world-wide with their FDDs and franchise purchases. Barber also represents emerging and established franchisors. Contact Barber at 980-202-5679 or JBarber@barberpowerlaw.com. Visit www.barberpowerlaw.com.

Franchise Success by Avoiding Common Mistakes

By Paul Segreto

Mistakes are a part of life. However, learning from mistakes is part of life, too. But if you could learn from the mistakes of others rather than your own, wouldn’t you want to?

There are some common mistakes individuals make when exploring and investing in a franchise, and they’re easy to avoid. Here’s a few to watch out for, so you can improve your chances of success in your new business.

Mistake 1: Not Learning About Life as a Franchisee

Sure you have good instincts, but when investing in a franchise, relying solely on your instincts is not necessarily the best decision. Rather than just trusting your instincts, which could land you in hot water with your franchisor, landlord, or tenant, choose to learn all you can before you finalize any agreement. That said, always trust your gut and dig into what may be giving you a bad feeling. Talk with other franchisees. Ask them to share with you a day in the life of a franchisee. Also, speak with other tenants in the shopping center where you’re considering a lease. For both parties, ask whether they would do it again.

Knowledge is power. By learning from a leader within the franchise organization—as well as doing your own thorough research before you dive in—you are setting yourself (and your franchise) up for success. Ask franchisees how issues and disagreements have been addressed in the past. Ditto for tenants.

Mistake 2: Rushing Your Due Diligence

Slow and steady can win the race, even in franchising. While you might be eager to get started as soon as possible, there may be moments where more time—and patience—is prudent.

For example, when choosing a location for your business, never allow yourself to be in such a rush that you choose a bad location or fail to negotiate. You want not only the best rate per square foot, but also a tenant improvement allowance and other benefits, such as free rent. Look to the future by checking current visibility, and try to determine if there’s a possibility of that visibility being blocked, maybe by a new building on a pad site along the property’s outer rim or heaven forbid, road construction. Often, plans for both are made well in advance.

Mistake 3: Not Following and Trusting in the Process

Remember, you are making an investment in a franchise. That means you’re making an investment in that franchise’s brand, processes, and procedures. Understand what that means and what you’ll need to do to adhere to operations manuals regarding the same. It’s a huge responsibility that may carry some significant liabilities if you’re not in compliance.

You will want to make certain before you finalize your investment that you fully understand the responsibilities—the franchisor’s and your own. Read the small print closely and carefully, so that you are fully onboard when you sign on the dotted line(s). This applies to all agreements—lease, equipment, suppliers, etc. Remember, it’s difficult to put toothpaste back in the tube. So, be diligent on the front end of all transactions and heed the age-old advice of haste makes waste.

Paul Segreto is a recognized entrepreneur, franchise- and small-business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at paul@franchisefoundry.com.

Franchise Success by Avoiding Common Mistakes

By Paul Segreto

Mistakes are a part of life. However, learning from mistakes is part of life, too. But if you could learn from the mistakes of others rather than your own, wouldn’t you want to?

There are some common mistakes individuals make when exploring and investing in a franchise, and they’re easy to avoid. Here’s a few to watch out for, so you can improve your chances of success in your new business.

Mistake 1: Not Learning About Life as a Franchisee

Sure you have good instincts, but when investing in a franchise, relying solely on your instincts is not necessarily the best decision. Rather than just trusting your instincts, which could land you in hot water with your franchisor, landlord, or tenant, choose to learn all you can before you finalize any agreement. That said, always trust your gut and dig into what may be giving you a bad feeling. Talk with other franchisees. Ask them to share with you a day in the life of a franchisee. Also, speak with other tenants in the shopping center where you’re considering a lease. For both parties, ask whether they would do it again.

Knowledge is power. By learning from a leader within the franchise organization—as well as doing your own thorough research before you dive in—you are setting yourself (and your franchise) up for success. Ask franchisees how issues and disagreements have been addressed in the past. Ditto for tenants.

Mistake 2: Rushing Your Due Diligence

Slow and steady can win the race, even in franchising. While you might be eager to get started as soon as possible, there may be moments where more time—and patience—is prudent.

For example, when choosing a location for your business, never allow yourself to be in such a rush that you choose a bad location or fail to negotiate. You want not only the best rate per square foot, but also a tenant improvement allowance and other benefits, such as free rent. Look to the future by checking current visibility, and try to determine if there’s a possibility of that visibility being blocked, maybe by a new building on a pad site along the property’s outer rim or heaven forbid, road construction. Often, plans for both are made well in advance.

Mistake 3: Not Following and Trusting in the Process

Remember, you are making an investment in a franchise. That means you’re making an investment in that franchise’s brand, processes, and procedures. Understand what that means and what you’ll need to do to adhere to operations manuals regarding the same. It’s a huge responsibility that may carry some significant liabilities if you’re not in compliance.

You will want to make certain before you finalize your investment that you fully understand the responsibilities—the franchisor’s and your own. Read the small print closely and carefully, so that you are fully onboard when you sign on the dotted line(s). This applies to all agreements—lease, equipment, suppliers, etc. Remember, it’s difficult to put toothpaste back in the tube. So, be diligent on the front end of all transactions and heed the age-old advice of haste makes waste.

Paul Segreto is a recognized entrepreneur, franchise- and small-business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at paul@franchisefoundry.com.

Two-Way Streets

Franchisors want to know that potential franchisees are a good fit

By Paul Segreto

Recently, a group of people inquired about a franchise opportunity with a fast-growing, emerging brand my firm had been representing for the past year. The candidates were financially qualified for several locations. We had multiple calls, including an FDD review, and on every call the group’s focus was on location and getting started ASAP.

Despite their aggressive nature, we kept them on course and guided them through the process. During Discovery Day, they met the brand’s founders for the first time. Here’s where things went south. The five candidates kept themselves busy talking to each other. They spent their time scribbling notes, running numbers, talking about location, all amongst themselves. They made no effort to speak with the founders, ask them questions, or interact at all. They merely told the founders how they should change this or revise that—and how they’d like to do so when they opened their business.

Seeing how quickly this meeting was going off course, we tried to create interaction between the parties. The founders worked hard to engage with the candidates, asking questions, trying to determine if there was a fit. When a founder asked the group, “Why this brand? What do you like about it?” The response was cool: “We know we can make money and when we do, we’ll commit to other locations.”

A day later, the group had signed a letter of intent on a location, procured a cashier’s check for the franchise fee, and they were ready to sign the franchise agreement that very day. The franchisors, however, weren’t interested. They didn’t believe these individuals would follow the processes and procedures the founders had meticulously developed and invested in for more than eight years. The founders knew their system was working quite well, as evidenced by high customer satisfaction and great unit economics including excellent profit margins. Long story short: They rejected the candidates.

This scenario isn’t uncommon—in fact, it’s unfolding more and more as franchisors are focusing on finding the right candidates for their franchises. Processes have evolved from applications and financial qualifications to evaluations of whether candidates are right for the franchise system and with where the system is today. Want to own a franchise? Start by working on your relationship with the franchisor.

COMMUNICATION IS KEY

A statement frequently heard is the franchise relationship is interdependent—the franchisor and the franchisee are dependent upon each other. Your success is our success, and our success is your success. Franchisors are emphasizing strong foundational components of relationships built on open, two-way communication, as opposed to the old cliché, “You’re in business for yourself, but not by yourself.” Many believe the franchise relationship is like a marriage, complete with a courtship before the I do’s.

Candidates are known to push through the process entirely focused on whether the opportunities are right for them. They give little to no thought about the franchisor’s perspective. Many believe the franchisees are the only ones making big commitments in ‘buying’ the franchise. They think the franchisor should be grateful, never giving thought to what that franchisor brings to the table.

Franchisors want to know that their franchisees are good fits for the brand—and for them, too. That’s where my group of candidates went wrong. The founders passed on their application because they believed the values they worked so hard to build throughout the brand—the ones their franchisees instilled every day—would ultimately be missing under this group’s management.

Had they tried to demonstrate that they were team players and interested in a relationship that worked both ways, the outcome could have been different. Learn from their mistake: A little genuine interest in the franchisors—along with the brand—could be the most important step toward sealing the deal.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at Contact Segreto at paul@franchisefoundry.com.

Two-Way Streets

Franchisors want to know that potential franchisees are a good fit

By Paul Segreto

Recently, a group of people inquired about a franchise opportunity with a fast-growing, emerging brand my firm had been representing for the past year. The candidates were financially qualified for several locations. We had multiple calls, including an FDD review, and on every call the group’s focus was on location and getting started ASAP.

Despite their aggressive nature, we kept them on course and guided them through the process. During Discovery Day, they met the brand’s founders for the first time. Here’s where things went south. The five candidates kept themselves busy talking to each other. They spent their time scribbling notes, running numbers, talking about location, all amongst themselves. They made no effort to speak with the founders, ask them questions, or interact at all. They merely told the founders how they should change this or revise that—and how they’d like to do so when they opened their business.

Seeing how quickly this meeting was going off course, we tried to create interaction between the parties. The founders worked hard to engage with the candidates, asking questions, trying to determine if there was a fit. When a founder asked the group, “Why this brand? What do you like about it?” The response was cool: “We know we can make money and when we do, we’ll commit to other locations.”

A day later, the group had signed a letter of intent on a location, procured a cashier’s check for the franchise fee, and they were ready to sign the franchise agreement that very day. The franchisors, however, weren’t interested. They didn’t believe these individuals would follow the processes and procedures the founders had meticulously developed and invested in for more than eight years. The founders knew their system was working quite well, as evidenced by high customer satisfaction and great unit economics including excellent profit margins. Long story short: They rejected the candidates.

This scenario isn’t uncommon—in fact, it’s unfolding more and more as franchisors are focusing on finding the right candidates for their franchises. Processes have evolved from applications and financial qualifications to evaluations of whether candidates are right for the franchise system and with where the system is today. Want to own a franchise? Start by working on your relationship with the franchisor.

COMMUNICATION IS KEY

A statement frequently heard is the franchise relationship is interdependent—the franchisor and the franchisee are dependent upon each other. Your success is our success, and our success is your success. Franchisors are emphasizing strong foundational components of relationships built on open, two-way communication, as opposed to the old cliché, “You’re in business for yourself, but not by yourself.” Many believe the franchise relationship is like a marriage, complete with a courtship before the I do’s.

Candidates are known to push through the process entirely focused on whether the opportunities are right for them. They give little to no thought about the franchisor’s perspective. Many believe the franchisees are the only ones making big commitments in ‘buying’ the franchise. They think the franchisor should be grateful, never giving thought to what that franchisor brings to the table.

Franchisors want to know that their franchisees are good fits for the brand—and for them, too. That’s where my group of candidates went wrong. The founders passed on their application because they believed the values they worked so hard to build throughout the brand—the ones their franchisees instilled every day—would ultimately be missing under this group’s management.

Had they tried to demonstrate that they were team players and interested in a relationship that worked both ways, the outcome could have been different. Learn from their mistake: A little genuine interest in the franchisors—along with the brand—could be the most important step toward sealing the deal.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at Contact Segreto at paul@franchisefoundry.com.

Breaking Down the FDD

Items 12 & 20: Territories and Units

by Nicole Micklich

Before you purchase a franchise, you should understand how much and what type of competition you might face from your franchisor and from other franchisees. The FDD provides information to help you investigate. You can find this information in Items 12 and 20 of the FDD.

Item 12: Territory

Under Item 12 of the FDD, the franchisor must disclose whether the franchisee is given an exclusive territory. An exclusive territory is a geographic area granted to a franchisee, within which the franchisor promises not to open itself or allow another franchisee to open a unit selling the same or similar goods or services.

If the franchisor is not offering the franchisee an exclusive territory, then Item 12 must issue the following warning: “You will not receive an exclusive territory. You may face competition from other franchisees, from outlets we own, or from other channels of distribution or competitive brands that we control.”

A franchisor that does not establish company-owned or franchised units within the franchisee’s territory does not have to include that warning, even if it reserves the right to make sales in the franchisee’s territory through alternate channels of distribution, like the Internet, or through competitive brands that it owns or controls. So whether or not the franchisor grants exclusive territories, the franchisor must provide detailed information about the territories it assigns and sales restrictions within the territories. That means that no matter what, Item 12 must disclose the franchisor’s rights to sell within the franchisee’s territory.

Item 12 should disclose:

Whether the franchisor can solicit or accept orders from customers within the franchisee’s territory

Whether the franchisor reserves the right to use alternate channels of distribution within the franchisee’s territory, like the Internet, telemarketing, or a catalog

Whether the franchisor will pay the franchisee for soliciting or accepting orders within the franchisee’s territory

Whether the franchisee is prohibited or restricted from soliciting or accepting orders from outside his or her territory, including whether the franchisee has the right to use alternate channels, like the Internet, telemarketing, or a catalog

Plans the franchisor has to operate a competing franchise system offering goods or services similar to those offered in the system described by the FDD

Item 20: Outlets and Franchisee Information

Item 20 tells you about the ownership of other units. This item must include five tables that are supposed to capture changes in the ownership of units. The first table is a summary of the units in the system and shows the net changes in the total number of outlets, franchisor- and franchisee-owned, over the preceding three-year period. You should understand whether the total number of units in the system is increasing or decreasing and at what rate. And then, you need to figure out why and what that means for your chances of success.

Check in with current and former franchisees. If you buy a franchise, your contact information may be disclosed to other buyers when you leave the franchise system. Item 20 of the FDD should include a list with the contact information of all current franchisees in the system—or, if there are 100 or more franchisees in the state, the current franchisees where the prospect will do business. Item 20 also must disclose limited contact information for every former franchisee who was terminated, not renewed, or otherwise stopped doing business as a franchisee, during the most recent fiscal year. You should not hesitate to contact franchisees and ask questions as part of your analysis.

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

SPECIAL SECTION: PART 5

Breaking Down the FDD

Items 12 & 20: Territories and Units

by Nicole Micklich

Before you purchase a franchise, you should understand how much and what type of competition you might face from your franchisor and from other franchisees. The FDD provides information to help you investigate. You can find this information in Items 12 and 20 of the FDD.

Item 12: Territory

Under Item 12 of the FDD, the franchisor must disclose whether the franchisee is given an exclusive territory. An exclusive territory is a geographic area granted to a franchisee, within which the franchisor promises not to open itself or allow another franchisee to open a unit selling the same or similar goods or services.

If the franchisor is not offering the franchisee an exclusive territory, then Item 12 must issue the following warning: “You will not receive an exclusive territory. You may face competition from other franchisees, from outlets we own, or from other channels of distribution or competitive brands that we control.”

A franchisor that does not establish company-owned or franchised units within the franchisee’s territory does not have to include that warning, even if it reserves the right to make sales in the franchisee’s territory through alternate channels of distribution, like the Internet, or through competitive brands that it owns or controls. So whether or not the franchisor grants exclusive territories, the franchisor must provide detailed information about the territories it assigns and sales restrictions within the territories. That means that no matter what, Item 12 must disclose the franchisor’s rights to sell within the franchisee’s territory.

Item 12 should disclose:

Whether the franchisor can solicit or accept orders from customers within the franchisee’s territory

Whether the franchisor reserves the right to use alternate channels of distribution within the franchisee’s territory, like the Internet, telemarketing, or a catalog

Whether the franchisor will pay the franchisee for soliciting or accepting orders within the franchisee’s territory

Whether the franchisee is prohibited or restricted from soliciting or accepting orders from outside his or her territory, including whether the franchisee has the right to use alternate channels, like the Internet, telemarketing, or a catalog

Plans the franchisor has to operate a competing franchise system offering goods or services similar to those offered in the system described by the FDD

Item 20: Outlets and Franchisee Information

Item 20 tells you about the ownership of other units. This item must include five tables that are supposed to capture changes in the ownership of units. The first table is a summary of the units in the system and shows the net changes in the total number of outlets, franchisor- and franchisee-owned, over the preceding three-year period. You should understand whether the total number of units in the system is increasing or decreasing and at what rate. And then, you need to figure out why and what that means for your chances of success.

Check in with current and former franchisees. If you buy a franchise, your contact information may be disclosed to other buyers when you leave the franchise system. Item 20 of the FDD should include a list with the contact information of all current franchisees in the system—or, if there are 100 or more franchisees in the state, the current franchisees where the prospect will do business. Item 20 also must disclose limited contact information for every former franchisee who was terminated, not renewed, or otherwise stopped doing business as a franchisee, during the most recent fiscal year. You should not hesitate to contact franchisees and ask questions as part of your analysis.

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

How Game-Changer Franchises Handle Legal Issues

By Jonathan Barber

Game-changer franchises are filling niches, raising the bar on service, helping communities, building cult followings, creating opportunities for others, and generally turning heads everywhere. Aside from growing their franchises, game changers are truly interested in their franchisees’ well-being, and so they’re also rethinking how they view—and handle—legal issues.

Instead of dropping the hammer and collecting, game-changer franchisors are electing to help franchisees get past hurdles. Here, we’ll show you a few ways franchisors are changing the game and looking out for their franchisees on the legal front. Incidentally, this strategy is great for business because when the system works together, the brand takes off.

The Franchisee-Friendly Franchise Disclosure Document

We all know that the franchise disclosure document (FDD) is flat-out hard to read. Even though the federal franchise rules require FDDs to be “written in plain English,” lawyers just have a field day typing up run-on sentences chock full of four-syllable words. At the end of the drafting process, the franchisor has a 200-to-300-page document that they don’t fully understand.

Fortunately, there is a growing movement, particularly among younger, more entrepreneurial franchisors, to keep FDDs short, sweet, and to the point. My firm has recently drafted a few that, including the franchise agreement and all exhibits and addendum, come in at (or under) 100 pages. While the FDD and franchise agreement are at the heart of the franchisor/franchisee relationship, there is so much more that goes into running a successful franchise. The FDD shouldn’t be something that scares away prospective franchisees. In fact, it’s the franchisor’s biggest sales piece, and it should be drafted and treated like that.

Handling Franchisee Problems

A “default” occurs when a franchisee breaches the terms of his franchise agreement. Traditionally, when a franchisor caught wind of a franchisee doing something wrong, the franchisor would send a Notice of Default and then, if warranted, terminate that franchisee’s franchise agreement. Now, however, there is a growing trend among newer, younger franchises, in which the franchisor is more willing to work with franchisees to fix things.

A great example of this is when a franchisee gives a franchisor notice that the franchisee will not be able to meet its financial obligations for one reason or another. The franchisee may have cash-flow issues, staffing problems, or even personal things going on that could lead to this problem.

At this point, a franchisor has two options. On one hand, the franchisor could put the franchisee in default and proceed with terminating their franchise agreement once the opportunity arises. Then the franchisor could legally go after the franchisee for past due royalties, liquidated damages, attorney’s fees, and other expenses through the franchisee’s personal guaranty. That could be devastating to an individual franchisee and his family. Nevertheless, this has happened many, many times in just about every franchise system out there.

On the other hand, the franchisor also has the option to work with the franchisee. The franchisor could waive, reduce, or defer royalties for a few months. He may even send some support staff to help the franchisee operate the business more efficiently. The franchisor could even facilitate the sale of the business to another franchisee or someone outside of the system. In certain cases, the franchisor may even opt to buy the business and take it on as a corporate or affiliate location. These options show that the franchisor puts the health of the overall franchise system and its individual franchisees above its own interests.

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of clients world-wide with their FDDs and franchise purchases. Barber also represents emerging and established franchisors. Contact Barber at 980-202-5679 or JBarber@barberpowerlaw.com. Visit www.barberpowerlaw.com.

How Game-Changer Franchises Handle Legal Issues

By Jonathan Barber

Game-changer franchises are filling niches, raising the bar on service, helping communities, building cult followings, creating opportunities for others, and generally turning heads everywhere. Aside from growing their franchises, game changers are truly interested in their franchisees’ well-being, and so they’re also rethinking how they view—and handle—legal issues.

Instead of dropping the hammer and collecting, game-changer franchisors are electing to help franchisees get past hurdles. Here, we’ll show you a few ways franchisors are changing the game and looking out for their franchisees on the legal front. Incidentally, this strategy is great for business because when the system works together, the brand takes off.

The Franchisee-Friendly Franchise Disclosure Document

We all know that the franchise disclosure document (FDD) is flat-out hard to read. Even though the federal franchise rules require FDDs to be “written in plain English,” lawyers just have a field day typing up run-on sentences chock full of four-syllable words. At the end of the drafting process, the franchisor has a 200-to-300-page document that they don’t fully understand.

Fortunately, there is a growing movement, particularly among younger, more entrepreneurial franchisors, to keep FDDs short, sweet, and to the point. My firm has recently drafted a few that, including the franchise agreement and all exhibits and addendum, come in at (or under) 100 pages. While the FDD and franchise agreement are at the heart of the franchisor/franchisee relationship, there is so much more that goes into running a successful franchise. The FDD shouldn’t be something that scares away prospective franchisees. In fact, it’s the franchisor’s biggest sales piece, and it should be drafted and treated like that.

Handling Franchisee Problems

A “default” occurs when a franchisee breaches the terms of his franchise agreement. Traditionally, when a franchisor caught wind of a franchisee doing something wrong, the franchisor would send a Notice of Default and then, if warranted, terminate that franchisee’s franchise agreement. Now, however, there is a growing trend among newer, younger franchises, in which the franchisor is more willing to work with franchisees to fix things.

A great example of this is when a franchisee gives a franchisor notice that the franchisee will not be able to meet its financial obligations for one reason or another. The franchisee may have cash-flow issues, staffing problems, or even personal things going on that could lead to this problem.

At this point, a franchisor has two options. On one hand, the franchisor could put the franchisee in default and proceed with terminating their franchise agreement once the opportunity arises. Then the franchisor could legally go after the franchisee for past due royalties, liquidated damages, attorney’s fees, and other expenses through the franchisee’s personal guaranty. That could be devastating to an individual franchisee and his family. Nevertheless, this has happened many, many times in just about every franchise system out there.

On the other hand, the franchisor also has the option to work with the franchisee. The franchisor could waive, reduce, or defer royalties for a few months. He may even send some support staff to help the franchisee operate the business more efficiently. The franchisor could even facilitate the sale of the business to another franchisee or someone outside of the system. In certain cases, the franchisor may even opt to buy the business and take it on as a corporate or affiliate location. These options show that the franchisor puts the health of the overall franchise system and its individual franchisees above its own interests.

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of clients world-wide with their FDDs and franchise purchases. Barber also represents emerging and established franchisors. Contact Barber at 980-202-5679 or JBarber@barberpowerlaw.com. Visit www.barberpowerlaw.com.